The country was cut to Baa3 from A3 and is on review for
further downgrade as it plans to borrow 100 billion euros ($126
billion) from European Union rescue funds to recapitalize its
banking system, adding to the government’s debt load, New York-based Moody’s said today in a statement. Spanish Prime Minister
Mariano Rajoy requested the rescue on June 9.

The key reason for the downgrade “is obviously the need of
Spain’s government to ask for external help,” Kathrin
Muehlbronner, a London-based senior analyst with the sovereign
group at Moody’s, said in a telephone interview. “In our view,
that’s not a sign of strength, it’s a sign of weakness.”

Spain’s ratio of debt to gross domestic product is expected
to rise to more than 90 percent by the end of the year, from
less than 40 percent in 2007, she said. The country’s ranking is
one level above junk, or speculative-grade. Moody’s said it will
likely finish its rating review within a maximum of three
months.

“One of the key reasons the rating is so close to the non-investment-grade category is we do see an increasing risk that
the Spanish government will have to seek further aid,”
Muehlbronner said.

Yields on Spanish debt due in 10-years climbed to 6.75
percent today, compared with 5.1 percent at the end of last
year.

“The Spanish government has very limited financial market
access,” Moody’s said in the statement, citing the nation’s
need for rescue funds and “its growing dependence on its
domestic banks as the primary purchasers of its new bond issues,
who in turn obtain funding from the” European Central Bank.